China’s state firms cool on new derivatives power

By Polly Yam and Chen Aizhu

HONG KONG/BEIJING (Reuters) – Chastened by several high-profile calamities in the recent past, many of the state companies China has freed to trade overseas derivatives will be sitting on their hands, put off by the risks or a lack of expertise.

Last week China’s State-owned Assets Supervision and Administration Commission of the State Council (SASAC) said roughly 100 more companies could trade in overseas futures, swaps and options markets without prior approval, on top of the 31 state-owned firms previously authorized.

That will allow such companies to be more efficient by hedging their exposure to changing commodity prices and will also give China more clout in global markets, particularly in oil, gas, coal and metals.

Of the newly empowered companies, 23 are in the energy business or are heavy users of fuels and coal, and there are also five steel companies, two nickel and copper miners and several base metals users.

There are also a couple of agricultural commodities firms, and some shippers might also want to trade freight forward agreements (FFA) to lock in profits, industry sources said.

Some companies are already looking to take advantage of the new opportunities.

China National Chemical Corp (ChemChina), which imports about 200,000 barrels of crude oil a day without hedging, was seeking approval from its board of directors to start trading overseas derivatives, a company source said.

“Now that we are qualified, we do want to use the derivatives to control price risks,” the source said.

A spokesman at Baosteel Group, China’s top steelmaker, also said the company would explore hedging.

RISKY BUSINESS

Others see a need, but are not ready.

Power company China Huadian has set up a new division to start importing natural gas and would need to hedge, but the company currently did not have a team for the imports yet, a company source said.

A source at a Western bank that has trained Chinese clients to trade metals futures said it would take at least six months to teach staff and understand the risks.

There is no shortage of local examples to illustrate the risks.

State-owned Chinese investment company CITIC Group made mark-to-market losses of nearly $2 billion in 2008 on foreign exchange positions to hedge currency exposure, while commodity buyer the State Reserves Bureau lost more than 900 million yuan ($145 million) on short copper positions in 2005.

Air China, China National Aviation Fuel, and shipper China Cosco Holdings, also suffered heavy losses on derivatives.

The head of futures at a central government-owned company said Beijing had acted in response to rising demand for hedging, but the newly enabled companies were aware of the risks and would be cautious.

“Letting the companies do it doesn’t mean they will. Conducting the trade does not mean they will have problems, so long as they just hedge physical materials,” the person said.

A senior executive at one of the companies said approval was only the first step, and the company would have “serious discussions” before embarking on such business.

A spokesman for China National Cotton Reserves Corporation’s said top management had no plans as yet for overseas futures trading, while executives at three Chinese airlines said their companies had no plans to trade overseas derivatives.

Another executive at a large airline said Chinese airlines and shipping companies had been badly burned in the late 2000s on fuel hedging and had shied away from it since.

Persuading managers to experiment in an activity that could be fatal to their careers could prove the biggest obstacle to take-up, said a derivatives marketing manager with a European bank.

“Without hedging, (making a loss) is the market’s fault. But if you make big losses because you’ve been hedging, it’s your fault.” ($1 = 6.2065 Chinese yuan)

(Additional reporting by Michelle Chen in HONG KONG, Niu Shuping and Fang Yan in BEIJING, Brenda Goh and Ruby Lian in SHANGHAI; Editing by Will Waterman)

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